Asian Markets Feel the Heat

The Bank of Japan today pumped one trillion yen (£4.2bn) into the country's money markets amid fears of the global knock-on effects of turmoil in the US mortgage sector.

The BoJ stepped in to boost liquidity following similar moves by the European Central Bank and the US Federal Reserve, marking the first time the banks have acted in unison since the terrorist attacks of September 11, 2001. Similar action was taken today by the Australian central bank while Malaysia, Indonesia and other Asian countries took their own steps to calm markets.

But Japanese authorities moved quickly to play down fears of damage to the country's finances as the Tokyo Stock Exchange took a plunge that left the Nikkei share index ending the day at a five-month low.

A sharp overnight decline on Wall Street sent the Nikkei down 2.37%, or 406.5 points, to close at 16,764 points, its lowest level since mid-March. The broader Topix index fell almost 3% to 1,633 points, the lowest since December 11.

Hiroko Ota, the economy minister, said Japan would experience a "limited" fallout from turmoil in the US sub-prime mortgage sector, in which widespread defaulting has raised fears of a global credit squeeze. "It is hard to tell how the sub-prime issue will affect the Japanese economy right now," she told reporters. "Its impact on the country's real economy is limited, but I will closely monitor its effects."

Analysts agreed that the risk to Japan was comparatively small. "The Japanese market will likely see a less direct impact from the sub-prime problems than its European and US counterparts, but there are concerns of an indirect impact through hedge funds, just as we saw in yesterday's trade," Naoki Koga, a senior fund manager at Toyota Asset Management, told Reuters.

Credit problems in the US mean it is less likely that the BoJ will raise interest rates at its meeting at the end of this month. The Japanese economic recovery had fuelled speculation that the central bank would raise the benchmark rate from the current 0.5% to 0.75%. But the chances of an increase fell from 65% to 36% overnight, according to calculations by Credit Suisse.